Inflows into domestic mutual funds are soaring. Is this trend here to stay?India has witnessed a move towards more financial assets, a trend which in itself has spurred this growth. Fewer people are putting as much money in real estate or gold as they did earlier. That shift is leading to a lot of inflows.

Demonetisaton has been one of the biggest drivers of this shift in investing habit. It is contributing to the growth of the mutual fund industry.

There is also the reality of many years of strong returns from the stock market. That is also a driver for people parking money in mutual funds. The trend is sustainable and part of a long-term cultural shift. I don’t think the benefits of demonetisation end in a year. It will have a multi-year effect and change the financial markets in the country in a meaningful way.

Is money flowing into the right funds?Typically we find that people chase performance. It implies that they are buying things at a time when perhaps it is not in their best interests. There is a tendency to pile into the market when prices are up. So while the mutual fund assets are growing for the right reasons, when we delve deeper into where the money is flowing, we realise that the performance chasing nature has not really changed. The flows into the mid- and smallcap funds segment reflect this nature where the outperforming asset classes tend to attract more money. It is also evident in the attraction towards a number of IPOs this year.

Balanced funds have witnessed a sharp rise in assets. Many AMCs are emphasizing on consistent dividend payouts from these funds. What are your thoughts?Balanced funds are good vehicles where the likelihood of the investor damaging his portfolio is limited as these are diversified across asset classes. They should be bought not because of the dividend play, but because it is the right risk profile and time horizon for the investor.

Are the new norms for categorisation of schemes a step in the right direction?As a regulator, Sebi has been pro-investor. They really do care about the outcome that investors get from their investments. Many of the guidelines or regulations it issues may not always be well received by the industry but generally they have the right intent. I view this reclassification through the same lens. Sebi has shown the right intent and now the question is how this will be implemented. In the long term, it will be very difficult for this to work without the free market itself guiding it.

I am a believer in free markets and their ability to self-correct if need be. This may help clean up some problems that persist in the industry, such as proliferation of products, but there are bound to be some side effects. It is a fine line that Sebi is walking. If the fund manager sees opportunities in different parts of the market than the regular sweet spot, you do want to afford him some flexibility and not be too prescriptive. At the same time, I don’t feel that it will restrict ability of the fund manager to generate alpha or kill innovation in the industry.

Are Indian mutual funds charging too much from the investor?There is definitely a lot of scope for lowering the expense ratio. While the fund industry has made a lot of strides over the last few years, expenses is not an area where it has evolved. Expense ratios in India are quite high. I anticipate that will start to change in the next few years. You have a regulator bringing change, more informed investors than ever before and rising competition from other vehicles like ETFs.

What is your assessment of the reducing alpha in certain fund categories?The alpha that has been generated so far is not sustainable. The Indian markets have been inefficient. There were fewer investors, and asset size was lower. All these things are changing and this portends a trend towards more efficiency. I would be surprised if the ability with which fund managers have been able to beat indices is sustained over the long term. Indian markets are getting more efficient. We will see fees go down and ETFs become more popular. Lowering expense ratio will probably put funds in a better position to compete over the longer term. It would be surprising if ETFs do not catch on in a meaningful way in India within next few years.

Is India ready for a shift to the fee-only advisory model being pushed by Sebi?It is being done with the best interest of the investor in mind. The regulator needs to do things that can be easily explained and are sustainable so policy can be long serving. In this instance, one could argue if the definitions are too restrictive, but it is hard to argue that it is not a pro-investor move. Investors will surely move towards a fee-based model. The shift is already underway, it is just a question of what pace it will happen.

How is the Indian mutual fund market placed on transparency and simplicity?Transparency has improved drastically, but there is more that can be done. A lot of things that are looked at currently are from the prism of ensuring the asset management company is not out of line with what the regulator believes is the right thing to do. But the intent should be to look for what is important for the investor. Improving investor access to products and bringing more people into the fold are critical.

The safety nets that people have enjoyed are receding. So learning to save and getting ready for retirement are relatively new concepts in India. With Aadhaar, we have the technology to make it simpler for the investor to start investing in funds.